THE SHORT ANSWER
Treasury Regulation §1.148-5(d)(6)(iii)(B) conditions the safe harbor's treatment of the purchase price as fair market value on receiving at least three bids from providers with no material financial interest in the issue, one from a reasonably competitive provider. With fewer, that condition fails, the regulation prescribes nothing for the shorter field, and a re-bid has to meet the same conditions again. Texas law adds a three-bid condition of its own for GICs.
When a solicitation for a guaranteed investment contract (GIC), or for an investment bought for a yield-restricted defeasance escrow, draws fewer than three bids that count, the issuer has not met the three-bid condition of the fair market value safe harbor under Treasury Regulation §1.148-5(d)(6)(iii)(B).
The consequence is specific: the safe harbor no longer treats the purchase price as fair market value on the purchase date, because §1.148-5(d)(6)(iii) produces that treatment only when all of its requirements are met, and the regulation prescribes no substitute for the missing bids.
This page covers why bid fields come up short and how a re-bid is built, within the broader guide to competitive bidding of bond-proceeds investments.
Why does a solicitation draw fewer than three bids?
A field falls short of three qualifying bids for two kinds of reasons: too few providers bid, or bids that arrive do not count under the regulation.
The count comes from Treasury Regulation §1.148-5(d)(6)(iii)(B), which requires at least three bids from solicited providers with no material financial interest in the issue, and at least one of the three from a reasonably competitive provider.
A reasonably competitive provider is one with an established industry reputation as a competitive provider of the type of investment being purchased, under §1.148-5(d)(6)(iii)(A)(7).
The material-financial-interest rule removes bids from the count before the issuer compares any of them: a lead underwriter in a negotiated underwriting transaction is deemed to have a material financial interest in the issue until 15 days after the issue date, under §1.148-5(d)(6)(iii)(B).
An entity acting as financial advisor on the investment purchase when the specifications go out has a material financial interest as well, and so do related parties of such providers.
The specification side is a condition of its own: §1.148-5(d)(6)(iii)(A) requires a bona fide solicitation to carry written bid specifications, timely sent, with all material terms and only commercially reasonable terms, and a solicitation that misses that standard fails the safe harbor's solicitation condition whatever its bid count; the bid specifications page covers that standard.
A field can also be manufactured, which is the subject of the SEC's bid-rigging cases.
The SEC charged Wachovia Bank on December 8, 2011, in a matter settled without admission, with rigging at least 58 reinvestment transactions in 25 states and Puerto Rico, and its litigation release describes two patterns: a last look, in which a provider received competing-bid information from the bidding agent, and a set-up, in which the agent deliberately obtained non-winning bids from other providers to rig the field in Wachovia's favor.
Against that, the specifications require the provider's own representation: under §1.148-5(d)(6)(iii)(A)(3), submitting a bid must be a representation that the provider did not consult other potential providers about it, set it without regard to other agreements with the issuer or anyone else, and is not submitting a courtesy bid.
The equal-opportunity condition in §1.148-5(d)(6)(iii)(A)(6) addresses the last-look pattern: no potential provider may be given an opportunity to review other bids that is not equally given to all potential providers, which is the exclusive last look the regulation rules out.
By December 2011, the SEC said more than $743 million had been recovered from financial institutions in its bid-rigging settlements, and it described the injury in the terms this page turns on: corrupted bidding deprived municipalities of a conclusive presumption that reinvestment instruments were bought at fair market value.
What happens to the fair market value safe harbor?
The bid condition fails, so the safe harbor's treatment of the purchase price as fair market value on the purchase date is not available from that solicitation.
Under §1.148-5(d)(6)(i), an investment not traded on an established securities market is rebuttably presumed not to be bought or sold at fair market value, which is why GICs and escrow portfolios rely on the bidding safe harbor.
Treasury Regulation §1.148-5(d)(6)(iii)(B) states what the issuer must receive, and prescribes nothing for the case in which the count comes back at two or one.
Lacking the presumption is not a determination that the price was not fair market value, and what can be concluded about a price from a short field is a question for bond counsel and tax counsel.
The safe harbor's bidding-side conditions are these:
| Condition | Where the regulation states it |
|---|---|
| Timely written specifications, permitted in electronic form, with all material terms and only commercially reasonable terms | §1.148-5(d)(6)(iii)(A)(1), (2), (4) |
| A no-collusion, no-other-agreements, no-courtesy-bid representation in the specifications | §1.148-5(d)(6)(iii)(A)(3) |
| For a GIC, solicitation terms that take into account the issuer's reasonably expected deposit and drawdown schedule | §1.148-5(d)(6)(iii)(A)(5) |
| An equal opportunity to bid for all potential providers, with no exclusive last look | §1.148-5(d)(6)(iii)(A)(6) |
| At least three reasonably competitive providers solicited | §1.148-5(d)(6)(iii)(A)(7) |
| At least three bids received from providers with no material financial interest, at least one from a reasonably competitive provider | §1.148-5(d)(6)(iii)(B)(1)-(2) |
| Where an agent runs the bidding, an agent that has not bid to provide the investment | §1.148-5(d)(6)(iii)(B)(3) |
A field of two qualifying bids fails the §1.148-5(d)(6)(iii)(B)(1)-(2) row, and every row in the table applies again to a re-bid.
State law can add a count of its own, and Texas does: Texas Government Code §2256.015(c) requires, for a GIC to qualify under that section, bids from at least three separate providers with no material financial interest in the bonds.
The other §2256.015(c) conditions sit alongside it: specific authorization of GICs in the bond order, ordinance or resolution, purchase of the highest-yielding qualifying bid, a price that reflects the reasonably expected drawdown schedule, and a provider certification of the administrative costs reasonably expected to be paid to third parties.
That is a state requirement, separate from the federal safe harbor in §1.148-5(d)(6)(iii), and it is Texas law rather than a rule that carries to other states; the state page on Texas covers that statute in context.
How does a re-bid work, and what are the alternatives?
A re-bid is a new solicitation that has to meet the same conditions as the first, from written specifications through the three-bid count.
The mechanics carry over: written bid specifications timely sent to potential providers, in electronic form if the issuer chooses, with all material terms and only commercially reasonable terms and, for a GIC, terms that take into account the issuer's reasonably expected deposit and drawdown schedule, under §1.148-5(d)(6)(iii)(A).
The no-collusion and no-courtesy-bid representation goes in the new specifications as in the old, under §1.148-5(d)(6)(iii)(A)(3), and every potential provider keeps an equal opportunity to bid under §1.148-5(d)(6)(iii)(A)(6).
On the count side, the issuer solicits at least three reasonably competitive providers, then needs at least three bids from providers with no material financial interest, one of them from a reasonably competitive provider.
A thin field also invites the wrong fix, and the Wachovia matter shows what it looks like: non-winning bids deliberately obtained from other providers to rig the field in Wachovia's favor.
The no-courtesy-bid representation under §1.148-5(d)(6)(iii)(A)(3) and the equal-opportunity condition under §1.148-5(d)(6)(iii)(A)(6) apply to a second round as to the first, and an agent engaged to run the second round must not have bid to provide the investment, under §1.148-5(d)(6)(iii)(B)(3).
The solicitation also has to be timely, a requirement the regulation states for the specifications themselves, and the bid timing page covers the calendar around it.
GFOA describes an escrow bidding agent that solicits bids for open-market escrow securities, and notes that a municipal advisor, if engaged, may be able to act in that role.
mGIC provides Bidding Agent services spanning bid specifications, soliciting qualified providers, managing questions, and receiving and comparing bids on rate and non-rate terms, and an issuer running the field again can use mGIC as Bidding Agent or start with a free, no-obligation conversation.
GFOA's best practice for bond proceeds recommends an investment policy under which fair market value bids are received when required by tax law and state or local laws; the investment policy page covers what such a policy contains.
If the field for one product type stays thin, the choice of instrument is a separate evaluation: permitted investments sets out the types issuers evaluate for bond proceeds.
Who decides what an issuer does next?
The issuer owns the procurement choices, whether to re-solicit and what the new specifications ask for; the legal and tax conclusions a short field raises belong to bond counsel and tax counsel.
Because the regulation is silent on the case that fails its count, documenting a short field, and any decision taken without the presumption, is work an issuer does with counsel.
If a short field is where an issue stands, mGIC offers a free, no-obligation reinvestment review or conversation, where a look at the first round and at what a second solicitation would have to meet can start.
The record around a bid, including one that fell short, is the compliance file page's subject.
Frequently asked questions
Can an issuer accept the best bid it has when only two bids arrive?
The regulation sets the three-bid count as a condition of the fair market value safe harbor and prescribes nothing for a field that falls short, so whether an issuer may proceed on fewer bids, and what documentation that takes, is a determination for bond counsel and tax counsel.
What is a reasonably competitive provider?
Treasury Regulation §1.148-5(d)(6)(iii)(A)(7) defines one as a provider with an established industry reputation as a competitive provider of the type of investments being purchased. The definition is specific to that investment type, so which providers fit it depends on the type being bid.
Does the Texas three-bid rule replace the federal safe harbor?
No. Texas Government Code §2256.015(c) writes its own condition for GICs, bids from at least three separate providers with no material financial interest in the bonds, separate from the federal bid requirement in Treas. Reg. §1.148-5(d)(6)(iii)(B). The two requirements stand on their own.
Sources
This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.
